Big Banks Lose a Battle

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In order to close a $70 billion gap in highway funding, Congress plans to raid the Federal Reserve and sell some oil from the Strategic Petroleum Reserve. Yesterday I called these moves “ill considered,” but David Dayen writes that there’s at least one pay-for in the transportation bill that’s also pretty good public policy.

Ever since its founding, the Fed has paid banks a 6 percent annual dividend on the stock they buy to become members of the Federal Reserve system. In 1913 this was designed to entice banks to join the newfangled scheme. Today, it’s just an annual gift. So Senate drafters decided to cut the dividend to 1.5 percent and use the rest of the money for the transportation bill. Banks went ballistic, but in the end they were unable to keep their full handout:

When the final bill was released Tuesday, the dividend reduction remained in there, albeit with some modifications.

The reduction now applies only to banks with over $10 billion in assets, compared to the $1 billion threshold in the original bill. Instead of cutting the dividend to 1.5 percent, the rate will now match the interest rate of the highest-yield 10-year Treasury note at the point that the dividend is due. For context, the high yield at the last Treasury auction was 2.304 percent.

It’s a small thing, but it’s always nice to see big banks lose a battle now and again. It keeps us all on our toes.


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